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INNOVA Gaming Group Announces Q2 Financial Results

LOS ANGELES, Aug. 11, 2016 /CNW/ - INNOVA Gaming Group Inc. ("INNOVA" or the "Company") (TSX: IGG), today announced financial results for the three and six months ended June 30, 2016. All figures in this press release are in U.S. dollars, unless otherwise noted.

Highlights – Operations

Deployed 82 net new LT-3 ticket dispensers ("LT-3") in Q2-2016 and 145 net LT-3's in the six months to June 30th. 2,022 LT-3's were deployed as of the end of Q2. 2,017 LT-3's are currently deployed.

Subsequent to the end of the quarter, INNOVA announced that its wholly owned subsidiary, Diamond Game Enterprises ("Diamond Game"), had signed an agreement with Tonk Group to distribute the LT-3 in New Hampshire under a charitable program regulated by the New Hampshire Lottery. The Company intends to begin deploying LT-3 dispensers in New Hampshire toward the end of 2016.

The Company continued to optimize its ticket printing process during the quarter, implementing additional quality verification and tracking functionality. These features are expected to reduce ticket scrap rates, lower production costs and further enhance the performance of tickets produced.

Diamond Game has continued to advance its strategic development initiative to integrate with the major providers of online lottery systems to enable the LT-3 to sell and display traditional draw games. Diamond Game has received positive feedback from lotteries on this "all-in-one" solution and believes this will facilitate new contracts and growth in same-device sales. The LT-3 has already been bid in successful online RFPs as an optional innovative product by some of these major providers.

Diamond Game was a Supporting Sponsor of the Canadian Gaming Summit ("Summit"), which took place in Ottawa, Ontario, in June. The Summit is Canada's premier gaming conference and was an effective platform for Diamond Game to showcase the LT-3 for potential customers and partners.

Highlights – Financial

Revenue in Q2-2016 of $5.9 million, compared to $5.5 million in Q2-2015

Average LT-3 WPU2 (win-per-unit) and ARPU3 (average revenue per unit) of $143 and $31, respectively

Adjusted EBITDA1 of $1.5 million in Q2-2016, compared to $1.4 million in Q2-2015

Adjusted EPS4 of $0.04 in Q2-2016, compared to $0.03 in Q2-2015

"As a Company, we are working toward meeting the strategic targets we outlined for shareholders at the beginning of 2016," said Richard Weil, Chairman and CEO of INNOVA. "We have built a strong base of recurring revenue and cash flow, LT-3 deployments are ongoing and ARPU for the year has been slightly ahead of our estimates as we have added exciting new features in a number of jurisdictions. We intend to begin to roll out our LT-3's in New Hampshire later this year and anticipate that we will successfully sign one further jurisdiction by the end of 2016. The addressable market for our LT-3 is large. We have only just begun to tap into this opportunity as we seek to grow INNOVA into a substantial player in the lottery and charitable gaming space."

Adjusted EBITDA is a non-IFRS measure. See "Non-IFRS Measures and Financial Indicators"

(2)

WPU is a non-IFRS measure. See "Non-IFRS Measures and Financial Indicators"

(3)

ARPU is a non-IFRS measure. See "Non-IFRS Measures and Financial Indicators".

(4)

Adjusted EPS is a non-IFRS measure. See "Non-IFRS Measures and Financial Indicators"

For the three month period ended June 30,

For the six month period ended June 30,

2016

2015

2016

2015

$

$

$

$

LT-3 Revenue

$

5,630,561

$

4,712,728

$

10,681,306

$

8,474,726

AGP Revenue

$

291,270

$

764,777

$

605,612

$

1,646,904

Total Revenue

$

5,921,831

$

5,477,505

$

11,286,918

$

10,121,630

LT-3 Key Performance Indicators ("KPIs"):

Total units

2,022

1,695

2,022

1,695

Net units deployed

82

219

145

320

WPU(2)

$

143

$

117

$

138

$

118

ARPU(3)

$

31

$

32

$

30

$

31

AGP KPIs:

Total units

264

692

264

692

Net units deployed (removed)

28

(60)

(213)

(71)

WPU(2)

$

161

$

106

$

174

$

110

ARPU(3)

$

11

$

12

$

13

$

13

(1)

Adjusted EBITDA is a non-IFRS measure. See "Non-IFRS Measures and Financial Indicators"

(2)

WPU is a non-IFRS measure. See "Non-IFRS Measures and Financial Indicators"

(3)

ARPU is a non-IFRS measure. See "Non-IFRS Measures and Financial Indicators".

(4)

Adjusted EPS is a non-IFRS measure. See "Non-IFRS Measures and Financial Indicators"

Revenue

Three months ended June 30, 2016

LT-3 revenue grew by $0.9 million or 19% compared to the same period in 2015. This was partially offset by a decrease in AGP revenue of $0.5 million or 62%. LT-3 revenue growth was primarily attributable to 327 additional machine deployments relative to the end of the same period in 2015, most significantly in the Missouri and the Maryland Veterans' program markets. Average LT-3 WPU increases reflect the maturation of WPU and ARPU in more established LT-3 locations, as well as the effect of deploying new game features in the Missouri and Ontario markets over the past year. The significant increase in AGP WPU is primarily due to the removal of the lower WPU AGP machines in Texas. The lower AGP revenue is primarily attributable to the removal of 428 machines from operation relative to the end of the same period in 2015, majority of these relates to the machine reductions in Texas.

Six months ended June 30, 2016

LT-3 revenue grew by $2.2 million or 26% compared to the same period in 2015. This was partially offset by a decrease in AGP revenue of $1.0 million or 63%. LT-3 revenue growth was primarily attributable to 327 additional machine deployments relative to the end of the same period in 2015, with the most significantly increased machine deployments occurring in Ontario, Missouri, and the Maryland Veterans' program markets. Average LT-3 WPU increases reflect the maturation of WPU and ARPU in the Maryland Veteran's market and the Quebec market, as well as the positive impact of introducing new game features in the Missouri and Ontario markets over the past year. The significant increase in AGP WPU is mostly due to the removal of lower WPU AGP machines in Texas. The lower AGP revenue is primarily attributable to the removal of 428 machines from operation relative to the end of the same period in 2015, the majority of these relates to the machine reductions in Texas.

The machine reductions in Texas resulted from the termination of an equipment lease agreement between the Company's wholly owned subsidiary, Diamond Game, and Blue Stone Entertainment LLC ("Blue Stone") on January 5, 2016. Prior to the termination, Blue Stone operated donation-based sweepstakes terminals leased from Diamond Game ("Terminals") at the Ysleta del Sur Pueblo's (the "Pueblo") two entertainment centers in Texas, pursuant to a separate agreement between Blue Stone and the Pueblo. The Terminals, which have been removed from the Pueblo's entertainment centers, are part of a class of products previously referred to in the Company's communications as alternative gaming products, or AGPs.

In connection with INNOVA's initial public offering, the Company entered into an EBITDA support agreement ("EBITDA Support Agreement") with Amaya Inc. pursuant to which, subject to certain terms and conditions, Amaya Inc. will pay INNOVA each year for up to five years from July 1, 2015 an amount equal to the shortfall, if any, between (i) the Company's EBITDA directly or indirectly derived from the deployment of Diamond Game's products at the Pueblo's entertainment centers or in connection with INNOVA's relationship with Blue Stone and/or the Pueblo, and (ii) C$2.0 million. The Company believes that the EBITDA Support Agreement will substantially mitigate any adverse financial impact resulting from this development. A copy of the EBITDA support agreement is available on SEDAR at www.sedar.com.

For the three and six month period ended June 30, 2016, the Company recognized $236,359 and $617,209 of EBITDA support compensation, respectively as part of other non-operating income (2015: $nil).

Missouri

In Missouri, the Legislature added budget language purporting to limit the scope of our pilot program, however; the legislative language remains unclear. We are in communication with the Lottery regarding the proper interpretation and what action will be required. While as of today it remains uncertain, it is likely that we will have to conclude the pilot at liquor by the drink locations. The program would continue in any event at fraternal club locations.

Cost of products

Three months ended June 30, 2016

Cost of products was lower by $0.3 million or 30% compared to the same period in 2015 due mainly to a one-time unfavorable standard inventory adjustment of $0.2 million in Q2 2015.

Six months ended June 30, 2016

Cost of products was relatively flat as compared to the same period in 2015. Higher machine service and data line expenses related to additional machine deployments was offset by a one-time unfavorable standard inventory adjustment of $0.2 million in Q2 2015.

Selling expenses

Three and six months ended June 30, 2016

Selling expenses were lower by $0.1 million compared to the same period in 2015 due mainly to lower royalty expense resulting from the termination of Texas lease agreements.

General and administrative expenses

Three months ended June 30, 2016

General and administrative expenses were lower by $0.7 million or 14% compared to the same period in 2015. The decrease was largely driven by: $1.6 million in one-time IPO related costs in Q2 2015 (discretionary bonus of $1.1 million which was offset by a commensurate $1.0 million of paid in capital and $0.5 million in acquisition related costs); partially offset by higher salaries and wages of $0.3 million resulting from 22 additional headcount; increased public company costs of $0.3 million, including higher audit and legal fees, consulting, directors and investor relations expenses and stock based compensation expense of $0.2 million.

Six months ended June 30, 2016

General and administrative expenses were higher by $0.3 million or 3% compared to the same period in 2015. The increase was largely driven by: higher salaries and wages expense of $0.8 million, resulting from headcount additions including hiring of senior management personnel in late Q1 2015; $0.6 million of increased public company cost, including higher audit and legal fees, consulting, directors and investor relations expenses; stock based compensation expense of $0.3 million; increase in software and depreciation expenses by $0.2 million, respectively, partially offset by $1.9 million in one-time IPO related costs in 2015 (discretionary bonus of $1.1 million, which was offset by a commensurate $1.0 million of paid in capital, and $0.9 million in acquisition related costs).

Financial expenses

Three months ended June 30, 2016

Financial expenses were lower by $0.3 million due mainly to lower foreign exchange losses.

Six months ended June 30, 2016

Financial expenses were lower by $1.1 million due mainly to lower foreign exchange losses of $1.0 million and an increase in interest income of $0.1 million.

Income taxes

Three and six months ended June 30, 2016

Income taxes increased by $0.6 million and $0.5 million for the three and six months ended June 30, 2016, respectively due mainly to an increase in earnings.

Outlook

We believe we are well-positioned for future growth in our existing lottery markets and other gaming markets. We have secured five lottery contracts in North America since 2012, four of which were earned after competitive request for proposal processes. Our sales and marketing staff continue to pursue both long-term recurring revenue relationships with new customers, as demonstrated by our upcoming deployment of LT-3 machines in the state of New Hampshire in approved charitable locations, as well as focusing on growth within existing customers, as evidenced by the increases in LT-3 units communicated in the yearly comparisons above. We believe that our business development team has the ability to capitalize on its extensive relationships and knowledge of market opportunities and customer needs and preferences.

We are also actively pursuing opportunities to continue to grow our average WPU by improving game functionality, offering new game titles, and introducing enhanced features. In Q4 2015 we extensively deployed new game features and enhancements into all existing facilities in Ontario. Since deployment, the new features have been very well received and have helped to bolster WPU and ARPU figures. Also in Ontario, we are in the final planning stages of deploying even newer games, titles and further expanding the presence of the enhanced features. Similarly, we launched a higher denomination game with the Missouri Lottery in Q2 2015. This new game dramatically outperformed all previous games in the Missouri market and has increased WPU and ARPU as a result. Applying this success that we have seen in Missouri to other markets, we are currently in the process of offering new game titles, higher denomination games, and enhanced features to the Maryland market, the Michigan market, and the Quebec market.

As a management team, we have a significant amount of experience executing accretive acquisitions and we see a number of opportunities in the lottery space. We will continue to evaluate opportunities and pursue those that meet both our strategic and financial criteria.

Normal Course Issuer Bid

Up to June 30, 2016, under the Normal Course Issuer Bid that became effective on March 29, 2016, the Company purchased 60,500 of its common shares at an average price of CAD$1.22 per share for a total amount of CAD$73,895.

INNOVA's interim consolidated financial statements and management's discussion and analysis for the Three and six months ended June 30, 2016 are available on SEDAR at www.sedar.com.

Non-IFRS Measures

INNOVA's financial statements are prepared in accordance with International Financial Reporting Standards ("IFRS"). In this press release, as a complement to results provided in accordance with IFRS, INNOVA discloses and discusses certain non‐IFRS financial measures, including EBITDA, Adjusted EBITDA, Adjusted EPS, WPU and ARPU as well as other measures discussed elsewhere in this release. These measures are not recognized measures under IFRS, do not have a standardized meaning prescribed by IFRS and are therefore unlikely to be comparable to similar measures presented by other companies. Rather, these measures are provided as additional information to complement those IFRS measures by providing further understanding of INNOVA's results of operations from management's perspective. Accordingly, they should not be considered in isolation nor as a substitute for analysis of INNOVA's financial information reported under IFRS. These measures are used to provide investors with supplemental measures of INNOVA's operating performance. For a full description of these measures and, where applicable, a reconciliation to the most directly comparable measure calculated in accordance with IFRS, please refer to the "Non‐IFRS Measures and Financial Indicators" section in INNOVA's Management's Discussion and Analysis for the three-month period ended March 31, 2016, available on SEDAR at www.sedar.com.

About INNOVA Gaming Group Inc.

INNOVA develops unique games and products for the global gaming industry, with particular focus on state and provincial lotteries. Through the Company's wholly owned subsidiary, Diamond Game, INNOVA focuses on enhancing the revenues of government-sponsored lotteries and other regulated operators by offering its unique "extended play" products in traditional and non-traditional gaming venues. Its primary product is the LT-3, an instant ticket vending machine that dispenses tickets while simultaneously displaying the results of each ticket on a video monitor in an entertaining fashion. For more information, please visit www.innovagaminggroup.com.

Forward-Looking Statements

Certain statements included herein, including those that express management's expectations or estimates of our future performance or future events, including with respect to the deployment of additional machines, the creation of higher sales volumes and ongoing revenue and the expected mitigation of adverse financial impact as a result of the EBITDA support agreement, constitute "forward-looking statements" within the meaning of applicable securities laws. Forward-looking statements are necessarily based upon a number of estimates and assumptions that, while considered reasonable by management at this time, are inherently subject to significant business, economic, regulatory and competitive uncertainties, contingencies and risks that could cause actual results or events to differ materially from those expressed or implied in such statements. Applicable risks and uncertainties include those identified under the heading "Risk Factors" in INNOVA's annual information form dated March 28, 2016, available on SEDAR at www.sedar.com, and in other filings that INNOVA has made and may make with applicable securities authorities in the future. Investors are cautioned not to put undue reliance on forward-looking statements. The forward-looking statements contained herein reflect INNOVA's current views with respect to future events, and except as required by law, INNOVA does not intend, and undertakes no obligation, to update any forward-looking statements to reflect, in particular, new information or future events, or otherwise.